Chapter 12

a cost that can be eliminated by choosing one alternative over another

avoidable cost

every decision involves

choosing from among at least two alternatives

what is the first-step in decision making

define the alternatives being considered

the key to effective decision making, focusing on the future costs and benefits that differ between the alternatives (everything else is irrelevant and should be ignored)

differential analysis

A future cost that differs between any two alternatives is known as

differential cost

Future revenue that differs between any two alternatives is known as

differential revenue

how would you solve the problem, the cost of raw material input is ____, which of the products should be processed beyond the split off point

find the incremental costs/revenue, then the (dis)advantage if it is positive keep going, if negative stop at the split off point per unit sales value if processed further - per unit sales at split off = incremental revenue incremental revenue - incremental cost (the processing cost per unit) = the advantage/disadvantage negative = no positive = yes

once you have identified the alternatives, what is the next step

identify the criteria for choosing among them (relevant costs, etc.)

an increase in cost between two alternatives

incremental cost

future costs and benefits that do not differ between alternatives are _______ to the decision making process

irrelevant

what should be ignored when making decisions

irrelevant costs, irrelevant benefits

what is the split off point

A point in the manufacturing process where joint products can be recognized as separate products. (This is the point at which the two products stop sharing the same process and become different, identifiable products.)

what are joint products

One of several products produced from a common input. (Joint products occur when one production process leads to the production of two or more finished products. These products are not identical, but they share the same production process up to what is called the splitoff point.)

how do you determine the financial advantage or disadvantage of eliminating a product

make a table, think about it logically, so with the product still there what is the net operating income then look at what it would be if you eliminate it, sales would be 0, variable expenses would be zero, so net operating income is just (-how many fixed expenses are left) the (dis)advantage is the difference between the original net operating income and what it would be if it were eliminated

need to be considered when making decisions, the potential benefit that is given up when one alternative is selected over another

opportunity cost

what should be considered when making decisions

relevant costs and relevant benefits

joint costs are incurred up to the

split off point

always irrelevant when choosing among alternatives, a cost that has already been incurred and cannot be changed regardless of what a manager decides to do

sunk cost